Discovery buys Scripps for $11.9 billion, creating cable giant

LOS ANGELES – Discovery Communications and Scripps Networks Interactive have reached an $11.9 billion deal to combine, a move aimed at creating a bulwark to withstand the challenges facing the television industry.

Discovery plans to acquire Scripps – the owner of HGTV, Food Network and the Travel Channel – in a cash-and-stock transaction that was announced early Monday. The combination would create a bulked-up programming company commanding nearly 20 percent of cable viewership in the U.S. and significant growth prospects internationally.

The proposed marriage of the two cable programming companies comes after two failed attempts to merge. However, this time the companies were spurred to combine because it has become increasingly difficult for medium-size independent media firms to stand on their own.

The Discovery-Scripps combination would create a more formidable entertainment company, one with several must-have cable TV channels. The deal is expected to close in early 2018.

“This is an exciting new chapter for Discovery. Scripps is one of the best run media companies in the world with terrific assets, strong brands and popular talent and formats,” David Zaslav, chief executive of Discovery, said in a statement announcing the deal.

Both Scripps – which boasts some of the country’s most popular lifestyle channels – and Discovery have been grappling with lower TV ratings and increased competition for viewers. Consumers have been dropping their pay-TV subscriptions in favor of lower-cost digital streaming options, including Hulu, Netflix and Amazon.com.

Those subscriber defections threaten a key source of revenue. Television distributors pay affiliate fees for the rights to carry Scripps’ and Discovery’s channels, and the fees are calculated based on the number of subscribers that receive the channels.

Discovery includes Animal Planet, Discovery, TLC, the crime channel ID (Investigation Discovery) and a stake in the Oprah Winfrey Network. The largest individual voting shareholder of the company, based in Silver Spring, Maryland, is cable mogul John Malone, who now lives on a sprawling ranch in Colorado.

Competitor Viacom Inc., controlled by the Sumner Redstone family, was said to also be vying for Scripps but dropped out of the bidding last week.

Scripps shareholders will receive $90 per share under the terms of the merger agreement. Of that, $63 will be in cash and $27 per share will be in Discovery’s Class C common stock. The deal price represents a 34 percent premium over Scripps’ share price on July 18, before news of the negotiations between the two companies leaked in news reports.

Discovery would assume Scripps’ $2.7 billion in debt.

When the deal is complete, Scripps shareholders would own about 20 percent of Discovery’s fully diluted common shares. Discovery shareholders would hold about 80 percent of the company.

Ken Lowe, the current chief executive of Scripps, is expected to join the Discovery board.

Mid-size programming companies such as Viacom, Discovery and Scripps have been at a disadvantage compared with larger entities such as NBCUniversal, Walt Disney Co. and 21st Century Fox. The major companies have numerous popular TV channels and significant clout with pay-TV distributors, including Charter Communications and DirecTV.

Currently, Discovery and Scripps heavily rely on their ability to negotiate favorable deals with pay-TV operators, but their leverage has diminished in recent years along with their ratings declines and consolidation among pay-TV distributors.

Discovery and Scripps, which is based in Knoxville, Tennessee, are leaders in unscripted programming. Combining would enable the companies to offer a beefed-up bundle of channels that Discovery-Scripps could offer directly to consumers.

“This helps with the skinny bundle, and it helps with the entertainment bundle,” Zaslav told Wall Street analysts during an early morning call to discuss the deal.

Operating a standalone streaming service would help Discovery-Scripps better control their destiny and remain relevant with younger consumers who watch fewer hours of linear television than their parents. This group is watching more programming on their phones and other internet-connected devices.

Analysts have been mixed on whether the deal would solve the problems facing the two companies.

“The two companies combined would have more leverage when negotiating with traditional distributors than they currently do separately,” Cowen & Co. media analyst Doug Creutz wrote in a report this month. But, he said, running a larger company is more complicated and “the two companies combined won’t have any more content/intellectual property with long-term value than they do currently as separate entities.”

Nonetheless, companies throughout the media landscape have been eager to merge. They want to bulk up to remain stronger so they can survive the coming storm, and unlike Scripps, Discovery has more extensive operations overseas – which is increasingly important as the U.S. market matures, and contracts.

“We believe there could be a base of 31 million homes that could cut or shave the cord over the next decade, with some networks declining at an even faster pace,” Barclay’s Capital media analyst Kannan Venkateshwar wrote in a report on July 24. “It is tough for us to imagine a world where all the 200+ cable networks in existence today remain viable.”